The program provides financial functions for risk assessment including Value at Risk (VaR) for equity portfolios. The output of the simulation is shown below. It covers option pricing models, hedging techniques, and trading strategies. This makes the interpretation and understanding of VaR relatively simple. Foundations of Finance: Bond Portfolio Management 12 Example 1 Consider the value of a bond portfolio consisting of one 7-year annual coupon bond: the portfolio value = value of the reinvested coupons + the market price of the bond. Understand bond immunization to manage risk, and assess non-vanilla bond risk using both effective duration and effective convexity. (2) Calculate the total value of portfolio: in Cell B9 enter =B3*(B8+1), and press the Enter key; (3) Calculate the value at risk of every day: in Cell B10 enter =B3-B9 , and press the Enter key; (4) Calculate the total value at risk of one month: in … Then, we will extrapolate these learnings to a portfolio of 20 assets, and estimate the weights of a portfolio that maximizes the expected return per unit of risk. Bonds Bonds are fixed-income securities that are issued by corporations and governments to raise capital. The formulas in the spreadsheet are password protected. Define duration again. Value at Risk of a Bond This Excel spreadsheet calculates the value at risk for a bond. The a b' ° initial data on the portfolio is in the table below. Minimization of the (conditional) Value-at-Risk for a coupon bearing bond using a bond put option Jan Annaert , Griselda Deelstra , Dries Heyman ( UGent ) and Michèle Vanmaele ( UGent ) ( 2006 ) Handelingen contactforum 4th Actuarial and financial mathematics day, 10 februari 2006 . Apart from professional assessment tools, we can calculate the value at risk by formulas in Excel easily. Consider the case of y =10% (Scenario I), and also consider an Calculate daily relative changes for each risk factor: ri,j t =ln Ri,j t … The Value at Risk (VaR) computation of any given portfolio of financial products can be broken in the following 8 stages: Stage 1: Determination of the underlying market variables that drive the portfolio price. Simply collect together all market variables that drive the price of each constituent product. The tail of the credit loss distribution is fatter when ρ = 0.9 than when ρ = 0.7. 3) We will use MSFT (stable), TSLA (highly volatile), an ETF and an Inflation Protected bond in our example. What is Value at Risk? Lecture 7: Value At Risk (VAR) Models Ken Abbott ... • The Excel functions for these two are var() and stdev() ... face value. − Credit risk capital is assigned based on the volatility of portfolio losses. Interest rate risk is mostly associated with fixed-income assets (e.g., bonds. Value-at-Risk incorporates duration with the probability of an adverse move in the interest rate. 2 first place, we need to know the initial value of the portfolio. The portfolio has a market value of £10 million, so the VaR of the portfolio is 0.032736 x Methods In this section, we outline the framework of ASRF model and discuss some key assumptions for modeling portfolio credit risk. t … manager who is holding your portfolio of $1 Billion in bonds and asks him or her about the chances of losses which in called as market risk, He or she would answer like, in 99% of the cases, over a 5 day horizon, we will not lose more than $200 million”. You can find other spreadsheets to calculate value at risk using variance-covariance, monte-carlo and delta-gamma methods here. There are valid reasons for its popularity – using VAR has several advantages.But for using Value At Risk for effective risk management without unwillingly encouraging a future financial disaster, it is crucial to know the limitations of Value At Risk. 6) Passive Bond Portfolio Strategies. You can also describe the contingency plan for responding to the risk, the event that will trigger the response, and the party that will handle the response. The portfolio has current value 0 p. Asset values 1 S i represent the accumulated value at time 1 of individual assets that might be held by the portfolio at time 0. Historical VaR. The risk-free rate is r f = 3%. Delta-Gamma approximation for Long And Short Option Positions. This includes in Subtract the new price from Step 4 from the original price of the bond. Recalculate the bond value based on the increased interest rate from Step 3. A value-at-riskmeasureis an algorithm with which we calculate a portfolio’s value-at-risk. 1. When value at risk is being used to determine loan loss reserves, capital adequacy, and internal capital allocations, the value at risk date is commonly many months in advance. The volatility of the portfolio value is the volatility of a linear function of two random variables, Ai and Ai., as long as we can consider current values of bonds and durations constant. Calculate Value at Risk for Bonds using Interest Rates – Rate VaR Figure 3 – Rate VaR Parameters Once you have the return series for interest rates, rate VaR uses the EXCEL standard deviation function to calculate the volatility of rates and then apply the VaR parameters to calculate Value at Risk for the relevant interest rate. The most important factor affecting a bond price is the interest rate. Value at Risk Spreadsheet Example in Excel Value at Risk (VaR) is a statistical measurement of downside risk applied to current portfolio positions. This is one of the easiest errors to make! Exhibit 9. Star 2. Value at Risk is a single number that indicates the extent of risk in a given portfolio. All transactions (first primary placement, re-opening, buy back) are recorded in the Transactions table. 11 The total exposure of the bond portfolio is 1. The solver is an Excel Add‐In created by Frontline Systems (www.solver.com) that can be used to solve general optimization problems that may be subject to certain kinds of constraints. Example #1 – Using the US Treasury Bond. Value At Risk is a widely used risk management tool, popular especially with banks and big financial institutions. 1. B. The portfolio’s market value at time 1 is given by the sum of the individual bonds’ accumulated values at time 1: [1.6] The portfolio value is B^ + Bh = 1500. 2.1. To build our concept of the portfolio risk, we shall calculate it first manually in EXCEL, then we shall replicate the results using matrix notations in Stata. For example, suppose we want to calculate the 1-day 95% VaR for an equity using 100 days of data. Recall the VaR (value at risk) example we did in class (BBKB Chapter 2 Excel Exampleuploaded on D2L). One line of investigation focuses on the assumption that portfolio value changes linearly with changes in risk factors. Use value at risk to forecast maximum losses over a period, with detailed step by step instructions provided to using the variance-covariance, historical simulation, and Monte Carlo methods. data for a government bond, calculated using one year’s historical observations. Excel Workbook for Treatment of a large Treasury Bond Portfolio By Werner Riecke. Portfolio Risk management is described as one of the most important elements from the perspective of the company. The market risk and specifically VaR is a very popular topic in the available literature. The question pertains to the delta-gamma version (i.e., the version for the option asset class) of the truncated Taylor Series. The results show that VaR has tail risk. 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